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Mott Capital Management
7/16/2019
In my January 30th report on the quarter and year just ended, I shared this thought with you: “The S&P 500 is likely to rise in 2019 and has the potential of reaching a range of 3,000 to 3,100, a gain of about 17% from its current level of around 2,665. Undoubtedly this viewpoint is in the minority among most investors, but that is nothing new; our reading of market signals is typically a few months ahead of broader market opinion.” I’m sure many of you thought I might have been crazy. However, I am thrilled to tell you that as of July 15, 2019, the S&P 500 is well positioned in my projected range, now trading at 3,013.
As a result of a stronger than expected US economy, I now expect the S&P 500 to rise to around 3,200 in 2019, up from my prior view.
Strong Portfolio Performance
Through June 30, the Mott Capital Thematic Growth Composite was up 19.7% net of fees and transaction costs. That was approximately 1.2% better than the S&P 500 Total Return Index and roughly 2.4% better than the S&P 500 without dividends.
Returns For The First Quarter 2019
| Thematic Growth +19.7% | S&P 500 Total Return +18.5% | S&P 500 +17.3% |
The Fed’s Second Pivot
Despite a sharp pullback in the month of May due to rising trade tensions between the US and China, the S&P 500 managed to advance by 3.8% during the quarter. The significant reversal came in June when the Federal Reserve pivoted for the second time in 2019 opening the door to a potential rate cut from the holding pattern it moved to in January.
Based on data from the CME Group, as of July 15 investors are currently pricing in a 70% chance of a 25-basis point rate cut at the next FOMC meeting on July 31, and a 30% chance for a 50-basis point cut. Additionally, anticipation is building for as many as three rate cuts by the end of January.
Reasons To Be Bullish
If it is at all possible, I find myself more bullish today then I was at the time I wrote the fourth quarter letter. I continue to believe that the US is not heading towards a slowdown or a recession. Low inflation rates and easy monetary policy should allow for multiple expansion or a higher price to earnings ratio as investors look for stocks with strong growth potential or higher yields. Given that backdrop, I have increased my outlook and target for the S&P 500 to 3,200.
I am currently modeling the S&P 500 to have earnings in the year 2020 of roughly $182.50, giving the index a PE ratio of about 16.5. On average since 1988, the S&P 500 has traded at approximately 17.5 times one-year forward earnings. At that earnings multiple, the S&P 500 would trade at my target of 3,200, which is about 6% higher than the level as of July 15.
Another bullish sign is that the spread between the S&P 500 SPDR ETF (SPY), a proxy for the S&P 500 dividend yield, and the US 10-Year Treasury rate is just 30 basis points. The last time the spread was this low was in 2016. From a historical perspective, the previous two times the spread contracted to these levels or lower it served as a significant turning point for the equity market, resulting in a sharp rise in stock prices.
Portfolio Review
Top 3 Winners and Losers for 2Q’19
| Walt Disney (DIS) +25.8% | Tesla (TSLA) -20.1% |
| Microsoft (MSFT) +13.6% | Alphabet (GOOGL) -8% |
| Mastercard (MA) +12.3% | Skyworks (SWKS) –6.3% |
Disney
Disney’s stock rose by almost 26% in the second quarter and finally had its big moment in April at its investor day when it unveiled its direct-to-consumer streaming service. It is the moment we have anticipated for years. I believe Disney’s stock still has plenty of upside as investors begin to realize the full potential of this new revenue stream.
Microsoft
Microsoft also had a robust second quarter, rising by almost 14%. The company’s growth continues to be driven primarily from its cloud unit. Subscription products such as Office 365 and Azure, the most significant cloud computing competitor to Amazon’s Web Services, have delivered blistering revenue growth rates.
Mastercard
Mastercard was up over 12%, coming off an increase of 25% in the first quarter. As I have often pointed out, the company is perfectly situated to prosper in a tech driven economy, and it executes nearly flawlessly. The stock’s performance reflects these strengths.
Tesla
Tesla’s stock plunged in the second quarter as the company came to the market for a capital raise. Additionally, fears mounted about weak demand for its Model 3 sedan and the potential for a miss on deliveries. However, as usual, those fears proved to be overblown when the company reported record deliveries in the second quarter and is preparing to ramp up production at its new facility in Shanghai, China.
Alphabet
Alphabet fell after reporting disappointing results. In hindsight, I thought the results were pretty good. The parent of the search engine Google is the dominant player in online advertising, and I don’t see that changing meaningfully in the future.
Skyworks
Skyworks fell during the quarter on trade war worries between the US and China. Additionally, Huawei, which is a big customer, was added to a blacklist by the US government blocking sales and forcing Skyworks to cut its revenue and earnings guidance. I continue to like Skyworks for its longer-term opportunities in 5G wireless technology.
Portfolio Changes and Business Updates
There were no changes to the portfolio during the second quarter, and I currently do not anticipate making any adjustments in our holdings in the third quarter, but that may change as companies report results throughout the month of July.
Believe it or not, Mott Capital has now been in operation for five years. During that time, we have experienced some wild periods in the stock market, and I thank you for putting your trust in me to weather those storms. As I reflect, the growth of the company has exceeded my expectations; starting with nothing other than my analytical insight and my enthusiasm for understanding market dynamics, the business has thrived. Thinking about what the next five years may bring is very exciting and pushes me forward every day.
I will continue to work my hardest to understand the current investment landscape and to stay ahead of the mob, while working to find new long-term thematic investments that are helping to reshape generational and demographic shifts.
If you should know of anyone that you feel would appreciate this letter or like the opportunity to learn more about how to invest with me, please feel free to pass along this letter and my contact information.
As always,
-Mike
Michael Kramer
Founder/Portfolio Manager
Mott Capital Management, LLC
Michael@mottcapitalmanagement.com
516-642-5788
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Disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.
Mott Capital Management, LLC (“Mott”) claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Mott has not been independently verified. The Thematic Growth Composite is a blend strategy of different market capitalizations, which is approximately divided equally among three sectors. The Core Growth sector includes large multi-national companies, the Growth Sector includes mid- to large-cap companies, and the Aggressive Growth sector includes small- to mid-cap companies. The strategy is concentrated, and typically includes approximately 20 positions, and 5% cash. The strategy only invests in stocks, ADRs, and ETFs denominated in USD. The All-Cap Growth Composite was created June 2015. The S&P 500 is a free-float capitalization-weighted index of 500 large-cap common stocks actively traded in the United States. The index is shown as a general market indicator and may not reflect the same exposures as the composite. The investment management fee schedule for the composite is 2% on the first $250,000, 1.5% on the next $750,000, and 1.0% on the remainder. Actual investment advisory fees incurred by clients may vary. Further information regarding investment advisory fees is described in Part II of the firm’s Form ADV. Past performance is not indicative of future results. The U.S. Dollar is the currency used to express performance. Performance shown represents total returns that include income, realized and unrealized gains and losses. Net of fee performance was calculated using actual fees. Composite performance is presented net of foreign withholding taxes on dividends, interest income, and capital gains. Withholding taxes may vary according to the investor’s domicile. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. The annual composite dispersion presented is an asset-weighted standard deviation calculated using accounts in the composite the entire year. The 3-Year Standard Deviation represents the annualized standard deviation of actual composite and benchmark returns, using the rolling 36-months ended each year-end. The 3-Year ex-post Standard Deviation of composite and benchmark returns is not presented because the composite strategy has less than three years of history.